WASHINGTON,
DC—The federal government’s most effective tool for reducing wealth
inequality is the estate tax, but the tax is being phased out so that
by 2010 the government will no longer collect taxes on the estates of
the rich. Eliminating this important source of federal revenue,
researcher Lisa A. Keister says, simply will create an economic burden
for 98 percent of Americans to allow a tax break to the wealthiest 2
percent of the U.S. population.

Keister,
an economic sociologist at Ohio State University, presents her research
on the repeal of the estate tax in the winter 2003 issue of Contexts magazine, a highly accessible science journal of the American Sociological Association.

By
2011, the cost of the repeal is likely to approach $60 billion a year
for the federal government and almost $9 billion for states. These
revenues will be replaced presumably by employment or sales tax
revenues.

“Although
the debate about the estate tax revolves around issues other than
inequality, both opponents and proponents of the estate tax have made
inequality a central point in their arguments,” asserts Keister.
“Disparities in wealth ownership among racial groups are among the most
extreme and persistent forms of inequality in the United states. In
1998, the median income of black households was about one-half that of
the median of white households, but black households’ wealth was only
about one-eighth that of median white households’ wealth. Because
minorities are over-represented among the asset-poor, they are likely
to be hurt disproportionately by repeal of the estate tax.”*

Keister
finds increased wealth inequality, especially among minorities, is not
the only negative consequence of the repeal of the estate tax. It may
decrease philanthropic giving by as much as 12 percent annually because
with the current system, inheritance donated to a charity is not taxed
and therefore is appealing to donors.

Although
estate tax opponents and proponents “disagree on most claims about the
estate tax, they do agree about the importance of wealth inequality,”
says Keister. “Unfortunately, discussion of the potential effects of
the estate tax on wealth distribution has remained speculative. The
data show that repealing the estate tax will indeed create more
inequality, and this will be costly for most American families.”

Opponents
of the estate tax claim that the tax unfairly penalizes those who save,
reduces incentives to work and targets small family businesses and
farms. Proponents of keeping the tax argue that the tax is highly
progressive, provides needed revenue to the government, bolsters
non-profit industry, and catches those who avoid income taxes on
capital gains. In the late 1990s, half of estate taxes were paid from
estates valued at more than $5 million—families in the top 1 percent of
wealth holders. The tax law also permits deductions for transfers to
the surviving spouse, funeral costs, estate administration expenses,
and charitable contributions.

Congress’s
intention for the estate tax was to create a mechanism to reduce
inequality. Keister finds that while inequality is still on the rise,
the estate tax does serve as a counterbalance. She developed a
simulation of what wealth would have looked like if the estate tax
threshold had not risen during the 1980s and 1990s. Using information
about the way people accumulate wealth, such as how much families have
in their bank accounts, the value of housing, and how these vary with
income, education and other demographic traits, she examined
alternative “what if” scenarios involving the estate tax. (The model is
described in her book Wealth in America: Trends in Wealth Inequality.)

“I
used the model to ask how wealth inequality would have changed during
the 1980s and 1990s,” explains Keister. Among her economic assumptions
were that other events had happened as they did, but Congress had not
increased the estate tax threshold beginning in 1980.

Keister
found that the share of wealth owned by middle-class and poor families
would have increased. She also found that by 1998, the top 1 percent
would have owned 32 percent of the nation’s wealth rather than the 38
percent they actually owned, and the top 20 percent would have held
about 73 percent instead of 83 percent of the national wealth.

Strengthening
the estate tax does not cause heirs of the wealthy to receive no
inheritance or to become poor. Rather, the tax reduces wealth
inequality. Therefore, Keister believes that repealing the estate tax
almost guarantees that wealth ownership will become increasingly
concentrated in the highest wealth sectors of the population.

Members
of the media interested in a copy of Keister’s article should contact
Johanna Ebner in the ASA Public Information Office (202-383-9005 x332, pubinfo@asanet.org). Further information on ASA's Contexts magazine, published by the University of California Press in Berkeley, can be found at http://www.contextsmagazine.org.

* Keister points out the importance of distinguishing between wealth and income.
Wealth is a person’s net accumulation of assets and savings, but
regardless of wealth, a person may have an income (i.e., the inflow of
money over time) at any level, from low to high. Wealth expands the
educational and occupational advantages of the wealth-inheriting
generation and provides social and political influence that can
translate into greater comfort, security, or wealth.

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